Viemed Healthcare, Inc. (NASDAQ:VMD) Q3 2023 Earnings Call Transcript

Viemed Healthcare, Inc. (NASDAQ:VMD) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Greetings, and welcome to Viemed’s 3Q 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host, Todd Zehnder, COO. Thank you, Todd. You may begin.

Todd Zehnder : Hi. Thank you. Good morning, everyone. Please note that our remarks in this conference call may include forward-looking statements under the U.S. Federal Securities Laws or forward-looking information under applicable Canadian Securities Legislation, which we collectively refer to as forward-looking statements. Such statements reflect the company’s current views and intentions with respect to future results or events and are subject to certain risks and uncertainties, which could cause actual results or events to vary from those indicated in forward-looking statements. Examples of such risks and uncertainties are discussed in our disclosure documents filed with the SEC or the security regulatory authorities in certain provinces of Canada.

Because of these risks and uncertainties, investors should not place undue reliance on forward-looking statements. The forward-looking statements made in this conference call are made as of today, and the company undertakes no obligation to update or revise any forward-looking statements, except as required by law. The third quarter financial news release including the related financial statements are available on the SEC’s website. Now I’ll turn it over to Casey to get things started.

Casey Hoyt : Okay. Thank you, Todd, and good morning, everyone. Welcome to our third quarter 2023 earnings call. Today, we’ll explore the financial achievements, market trends and strategic insights that have contributed to our continued success. We will provide details on how Viemed is not only thriving but also actively shaping the landscape of at-home respiratory care. We are executing at a very high level on our strategic initiatives, driving growth to financial results and remarkable growth. Our seamless integration of the HMP acquisition has accelerated our expansion of the core complex respiratory business and is rapidly diversifying our respiratory offerings. This significant stride is a testament to our steadfast focus on reaching more patients, enhancing their lives and improving outcomes.

Before we delve further into our results, I want to take a moment to thank our team for their hard work and dedication. Our success is built on the shoulders of an incredible team of dedicated healthcare professionals from our respiratory therapists and behavioral health specialists to our staffing professionals and administrative support staff they are the driving force behind Viemed’s exceptional results and continued record-setting growth. As of the end of the second quarter, our Viemed family has expanded to include 988 employees, each playing an important role in our collective success. Let me begin by commenting on our core organic business model. As a reminder, 58% of our business is generated by our complex respiratory service model, which is driven by ventilation.

Our vent patients are typically on our care for a 17-month length of stay at the end of their life. In terms of payer demographics, 45% of our patients are covered by traditional Medicare and 12% are enrolled in some form of Medicare Advantage or Managed Medicaid program. It’s worth emphasizing that historically, the Medicare patient population served by an industry as a whole constitutes just 6% of COPD patients eligible for noninvasive ventilation treatment. We estimate that the privately insurance population reflects similar numbers. This ongoing underserved patient segment is a key driver of our persistent growth. Our governor to growth is not about finding available patients to treat, but more about finding clinicians and salespeople available to communicate our offering to the physicians and hospital case managers.

Our staffing division, VHS has played a pivotal role in developing recruitment protocols that rapidly identify and onboard talented individuals. As a result, we are continuing to expand our training and management structure to support the growth of our personnel. This relatively new ability to source salespeople efficiently will certainly be the driving force behind our future geographic expansion. Additionally, we’ve observed substantial growth in our oxygen services, which constitute approximately 10% of our product mix and treats earlier stages of COPD. Given the terminal nature of COPD, it’s common for patients to progress to a point where they require our complex respiratory ventilation services in later stages of their journey. Notably, by the end of the quarter, approximately 18% of our oxygen patients also had ventilator usage.

It’s estimated that there are 12.5 million eligible oxygen patients in the country with only a 12% market penetration nationwide, representing yet another significantly underserved population in need of our help and opportunity for continued growth. With HMP, our most recent acquisition being a heavy sleep business, we’ve driven our sleep business up to 17% of our product mix. The highest margin segment within sleep is in the recurring mass tubing filter sector or as we call it, the resupply business. With the addition of HMP, our resupply business is now making up 47% of our overall sleep business. With an estimated 150 million people suffering from sleep apnea, only 30 million diagnosed and roughly 5% to 8% of the folks on service, we are once again taking care of an underserved population.

Many healthcare companies are confronting speculation around the adoption of GLP-1 diabetes and weight loss drugs. Viemed’s core complex respiratory business differentiates us from the other home medical equipment companies, making us less susceptible to competition from GLP-1 weight loss drugs. We have seen no measurable negative impact of these drugs being on the market, and perhaps the best way to prove this is to reflect on our third quarter numbers. Our organic Viemed business experienced 11% sequential sleep growth from Q2 and have grown our sleep business every — and we’ve grown our sleep business every quarter for the past year and half during the GLP-1 drugs while they’ve been on the market. Furthermore, our manufacturers of sleep equipment are also reporting zero findings of any decline related to GLP-1 drugs.

We fully expect to realize growth in our sleep business for 2024 and beyond. The successful integration of HMP into the Viemed Healthcare family has marked a significant milestone in our strategic growth trajectory. We are delighted to report that our first full quarter with HMP was immediately accretive to our net income and earnings per share, demonstrating the soundness of our investment. What’s equally crucial is that this acquisition hasn’t hindered our organic growth. Instead, it is active as a catalyst igniting new possibilities. Our commitment to enhancing our cost structure, while simultaneously setting the groundwork for revenue synergies has been at the heart of this integration. We’ve worked tirelessly to ensure a seamless transition, converting software and systems to align with our established processes and technology.

Furthermore, HMP employees have undergone comprehensive training, not only to adapt to the new systems, but to fully embrace our technology, unique service offerings and the Viemed value proposition. One of the keys to our successful integration has been the remarkable cultural fit between Viemed and HMP. This alignment of values, mission and work ethic has fostered a cooperative and harmonious environment, where we can leverage the strength of both organizations effectively. Looking ahead, we consider this acquisition as a strategic springboard for our organic growth model in several respects. Geographically, we are expanding into new areas, capitalizing on strength and synergies brought by HMP to penetrate markets that were previously untapped.

We are also growing complementary products and services that align with our core offerings, creating value for our patients and stakeholders. In addition, our broader network of payers is offering us exciting new avenues for growth, enabling us to maximize the reach and impact of our specialized home respiratory care. While our M&A pipeline is active it’s important to note that it remains supplemental to our primary growth driver, the organic engine. In a landscape where interest rates are rising and deal volumes are declining, we are fortunate to not be reliant on acquisitions to fuel our growth. We’ve consistently demonstrated that we are in a position to grow independently, leveraging our existing capabilities, infrastructure and expertise.

Our steadfast focus on organic growth allows us to maintain a strong and sustainable trajectory, making strategic acquisitions a nice complement rather than a necessity to our business model. In the third quarter, we continue to allocate resources towards technology. Our proprietary Engage platform and data analytics play a pivotal role in our achievements. While harnessing data to predict patient needs and tailored treatment plans, we have not only improved patient outcomes but have differentiated ourselves from our peers in the eyes of our referral sources and payers. We recently introduced Version 2.0, which we call Engage Care Manager. The enhancement within this tool facilitate greater cross-functional integration with multiple equipment manufacturers, enabling a device-agnostic approach to patient care.

The broader use of equipment on Engage Care Manager allows our manufacturing partners to have their devices be a part of the driving improved compliance and patient adoption within their devices. Ultimately, these advancements further solidify our position as a relevant player in an evolving value-based care landscape, demonstrating our commitment to innovation and excellence in patient care. On the regulatory front, we are experiencing a notable degree of stability with little recent movement. There have been no indications of the return of competitive bidding and we anticipate further improvements in reimbursement due to Consumer Price Index, CPI, to be implemented soon. There’s a national push from our industry association, AAHomecare to support continued common sense measures undertaken during the pandemic, particularly the 75-25 blended rates for CPAP and oxygen.

While these relief measures are crucial to ensure patients have necessary access to care, it’s important to note that their financial impact on Viemed is relatively modest as a result of our unique product mix and concentration in rural markets. In the event that the blended rate relief expires at year’s end, we estimate that our rates tied to the CMS fee schedule would still, on average, increase between 0.5% and 2% when we combine the CPI adjustment. This rule change, while not significantly impacting Viemed directly may hold more significance for other competitors across the country. In addition, we are eagerly anticipating the implementation of the final rule for Medicare Advantage Plan set for 2024. This rule introduces additional health plan utilization management oversight to processes, including mandatory annual reviews of MA plans, clinical policies and coverage denial reviews.

It’s conducted by healthcare professionals with relevant expertise. This rule will ultimately improve access to care for life-saving devices such as ventilators for patients struggling with a terminal disease. Our view is that the accountability for Medicare will be a positive tailwind for Viemed in 2024 and beyond. At this juncture, I will now hand the call over to Chief Operating Officer, Todd Zehnder to provide additional insights regarding our financial results and capital activities.

Todd Zehnder : All right. Thank you, Casey. In reviewing the financial results, all figures are in U.S. dollars and the full results have been made available on the SEC website as well as SEDAR. Our core business generated net revenue of $49.4 million during the third quarter of 2023 as compared to net revenues of $35.8 million in the third quarter of 2022, which equates to a 38% increase. Our sequential growth for the core business was 14% as we had HMP for the entire third quarter and our organic growth was once again strong. Without factoring in the acquisition, our growth rate over last year’s third quarter was approximately 19% and approximately 4% sequentially. We continue to stay optimistic that we will be able to continue our high organic growth rates as well as continue our evaluation of inorganic opportunities.

Our third quarter revenue from vents was approximately 58% of core revenue as compared to 67% in the third quarter of 2022. Our gross and EBITDA margin percentages are still strong and improving as we are focused on both margin and diversification. We’ve been very successful in managing our cost structure this year, and it is showing in both gross and EBITDA contribution. We continue to see our margin percentage be influenced by our product mix, but once again point out the rapid notional growth. Our gross and EBITDA margins during the quarter came in at 61.9% and 24.5%, respectively. Our third quarter gross and EBITDA amounts came in at $30.6 million and $12.1 million, respectively. A couple of highlights are that this is the highest gross margin percentage that we have posted in two years.

And our third quarter 2023 EBITDA is approximately 73% higher than third quarter 2022 EBITDA, which is a result of the continued organic growth, aggressive cost management and the closing of the HMP acquisition during June. Our SG&A for the quarter totaled approximately $23.7 million as compared to $17.7 million in the third quarter of 2022. We have managed our G&A during the current year effectively, which is evidenced by our EBITDA margins expanding by a wider margin than our gross margin percentages. We are benefiting from some scaling of our operations around the country as well as our home office. We’ll continue to invest in our patient and employee experiences and once again expect to grow revenues at a faster pace than expenses. For the quarter, we invested approximately $7.4 million on CapEx. And once again, the highest amounts have been spent on vents and oxygen equipment.

The CapEx has been spent through a diversified supplier network, and we are seeing additional supplier networks that have come or will be coming to market. We funded all of our CapEx with discretionary cash flow during the quarter, and our core business had a record of free cash flow after CapEx. We are very proud of the pristine balance sheet we maintained where we ended the quarter with a cash balance of $10 million. Additionally, we ended the quarter with an overall working capital of $4 million. We have paid down $4 million on our revolver facility during the quarter and have lowered our long-term debt at September 30 to approximately $8 million. We will opportunistically pay down or use the revolver portion depending on needs of cash resulting from additional organic growth or future inorganic opportunities.

When we step back and look at the ongoing financial performance of the business, our growth and diversification are really showing in the free cash flow that we are generating. We have grown the amount of revenue that is transactional over time, and therefore, it does not come with the same CapEx burden as our rental equipment growth. We are very confident in our ability to continue to grow our free cash flow even in light of our CapEx needs as we grow our active rental patients. This free cash flow generation will give us flexibility as we continue to monitor our capital allocation. As we review our capital allocation opportunities, we once again will reiterate that our organic growth is the highest priority. This quarter, we took the opportunity to pay down debt as we integrate the HMP transaction, and we will likely to continue to do that until another acquisition opportunity arises.

Lastly, we will actively monitor our share price and other factors to determine if another share buyback would make sense to be implemented. Moving on to the fourth quarter, we have provided net revenue guidance in the $49.8 million to $51 million range related to our core business. The midpoint of our net revenue guidance is up 34% over the core revenue in the fourth quarter of 2022. Lastly, we remain active in our discussions with existing and potentially new investors. We participated in a couple of institutional investor conferences during the third quarter and plan on attending another one during this quarter. We remain excited about telling our story of growth and see the current market as an opportunity to attract new investors. At this time, I’ll turn it back over to Casey to wrap things up.

Casey Hoyt : Okay. Thank you, Todd. Our unwavering commitment to pioneering advancements in the home respiratory care industry is evident with our impressive results we’ve achieved this quarter. We couldn’t be more proud of our management team and staff for their continued execution on every level. Reflecting on our business after the first three quarters, we are extremely bullish that our share price does not represent the value of our organization. We have grown every line of our business organically and are ahead of schedule on optimizing the HMP acquisition. The regulatory landscape is not only stable but favorable to our unique and specific business model. While we have a pipeline of acquisition targets ready, we have proven that we don’t have to rely on buying companies when the conditions aren’t right.

Our view is that our company is reasonably recession-proof with the ever-increasing need to taking care of an aging population yearning for more comfortable and quality care in the home. We are proud to highlight our historical results to investors, demonstrating Viemed’s proven track record of execution. Viemed Healthcare’s dedication to delivering high-quality specialized services and our relentless pursuit of innovative solutions continue to drive our success and set us apart as leaders in the field. As we move forward, we remain steadfast in our mission to provide the best care for our patients and to lead the industry through a commitment to excellence, innovation and unwavering dedication to improving patient outcomes. Our focus remains on treating the underserved population, and we are well-positioned to shape the home respiratory care industry for the better, ultimately benefiting our patients and stakeholders alike.

This concludes our prepared remarks. Thank you and we’ll now open up for further questions.

Operator: [Operator Instructions] Our first question comes from Brooks O’Neil with Lake Street Capital.

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Q&A Session

Brooks O’Neil : Good morning guys. Terrific quarter. You just keep executing, and it’s fantastic. So let me ask you one or two quick questions. The first one is I know that sleep is a relatively small part of the business. But I’ve heard anecdotally that there has been some softness in the sleep market. Could you just comment on whether you’re seeing that? And whether you think you can do something to offset softness in the business, in the industry or whether it’s something that’s going to be a headwind for a period of time?

Casey Hoyt : First off, we couldn’t disagree more that it would be a headwind for our business. I mean we’re experiencing 11% sequential growth in the sleep market. We have not seen any lack of adherence to tap equipment, whether it’d be on the front end as finding our patients or on the back end through resupply of folks giving up on therapy. I’m commenting on the market for a reason in my comments there, Brooks, just to let everyone know how large of a field we have of patients, and we’ve got 150 million patients over there in the country, and we only have a 5% to 8% market penetration on those guys. We’ve got a lot of work to do, but we have seen no effect from these GLP-1 drugs. They’ve been around for, what, 1.5 years, 2 years now.

And we’ve been in growth mode sequentially in sleep through that whole entire period. Even furthermore, you pay attention to some of our sleep manufacturers, you can draw the similar trend and story lines as well. They’re commenting that they’re not seeing any lack of adherence to sleep or any stunts to their growth. So look, I get it, it’s something — it’s a story line and everybody needs to beat it up and be skeptical for sure from an investor standpoint. But look, it’s — we’re very — hear me loud and clear, we are not experiencing any decline in sleep that’s only growth, and we expect to see more of that in the future.

Brooks O’Neil : Great. Let me ask you one other question. So I have some sense that one of your equipment suppliers, Philips has had some issues with the government and — can you comment on, A, if that’s affected you in any way? And if so, maybe how have you responded?

Casey Hoyt : Yes. I mean obviously, Brooks, this has been going on for a few years now. The recall affected the sleep apnea devices as well as the ventilators. The ventilators never were to be taken off of market because of the life-saving device component of it. As we understand the majority, if not all, of the sleep replacement devices have been taken care of, if it’s not completed, it’s very close. So we anticipate that they probably come back to market with sleep apnea devices at some point, call it, relatively soon, not sure when that happens. Obviously, there’s others in the market that have filled that need. On the ventilator side, they are in process of working with the government on some sort of remediation. Once again, that has not really impacted our business too much.

There’s operational logistic type things that we’ve dealt with. We’ve been dealing with those for three years, but we have no looming issue that we are aware of. Our anticipation is that, that remediation gets done at some point over the next few months. But until then, it’s just business as usual.

Brooks O’Neil : Right. Let me ask one last question. So I hear from some people who think that Viemed is like some other DME companies in the marketplace. I think those other DME companies are characterized by, A, growth by acquisition; B, I’d like to call them trucks and muscles. They pretty much have a bunch of trucks and the muscle guys drive them to the patient, drop off the equipment and keep moving. Could you just give us a — the Reader’s Digest version of why that is not Viemed and why you think your model creates tremendous opportunity in the marketplace?

Casey Hoyt : Yes. I mean it goes back to our complex respiratory business, which makes up 58% of what we do. That’s the foundation about scaling around the country. We never had the model of being a Wheelchair Walker Bed Commode type of business that was going to be your one-stop shop, all things, everything DME. And so that lends itself to where do you go? We don’t have to buy people in order to grow. We just need another person that we — a clinician that we can train out to walk and talk the Viemed way. We get in front of the sales process, walking shoulder to shoulder with that pulmonologist inside of the facility, and we become an extension of their care and a value resource to the hospital case managers who are paired up equipment providers with the patients.

And so at the end of the day, it’s two different separate business models. And you’re right the important thing to focus on is it goes back to our spin out. The reason that we spun out back in 2017 is that we had two different models for growth and two different needs of capital from the folks that purchase Viemed. They needed to go out and buy other companies in order to grow. We did not need that. We needed to go out and find people and put personnel. And so those — that is still dominant here today and is a trend in our growth plan and model and really is the differentiator from us and the competitor. Both models are successful. So I’m not throwing any of our peers or competitors under the bus. These guys have their own ways of growing.

We have our own way to growing. They are very different in our opinion, and we shouldn’t be lumped into the same category.

Brooks O’Neil : Absolutely. Thanks for that, Casey, and Todd, and thanks for all the good information. Have a nice day.

Operator: Our next question comes from the line of Doug Cooper with Beacon Securities.

Casey Hoyt : Doug, I don’t know if you’re on mute or not, but we can’t hear you.

Doug Cooper : Can you hear me?

Casey Hoyt : Yup, I can hear you now.

Doug Cooper : Okay. So first of all, great quarter, and obviously, the market is not really taking the numbers into consideration. So let me circle back on Brooks comment on, first of all, on the GLP-1 drugs aside getting into the fact that the market thinks — seems to think that respiratory illness is going away and sleep apnea is going away. I think it’s worth remembering that, as you said, 17% of your business is sleep. In other words, 83% is not impacted by these GLP-1 drugs. Can you just, first of all, make a comment about COPD and the GLP drugs? I’m assuming there’s zero impact on that, but just want confirmation for you.

Casey Hoyt : Yes, that’s correct. I mean the COPD patient is totally different than the sleep apnea patient. We — so I guess, complex respiratory, as we define it, is inclusive of percussion vest inclusive of oxygen and then ventilation. And so that business is really not affected or, I guess, targeted by GLP-1 drugs. There’s actually some studies out there that say that the skinnier the patient is, the more susceptible they are to death in the COPD realm at the end stages of their life. But we’re trying to — I’m glad you brought it up Doug because we do want to differentiate the fact that, yes, sleep, which is a bull’s-eye for the GLP-1s in a lot of people’s eyes is only 17% of our business and the rest is not affected by it.

Doug Cooper : So let’s just focus on the 17% for a second. Just — when ResMed reported the results, I guess, earlier in the week, they, on their conference call, they talked about that they are actively tracking a cohort of many thousands of patients who are on GLP-1 medications as well as ResMed’s PAP therapy, and they are not seeing any significant change in PAP adherence or any reduced participation in resupply programs versus the control group. So in their opinion, it seems to be that even if the case where some patients are on the GLP drug, those patients maybe obese or morbidly obese category and were outside of the mainstream healthcare system anyway and bringing those back into the force actually could help stimulate their business because sleep apnea devices are part and parcel with a road to wellness. Any thoughts on that?